Opinion
Civil Action No. 15754
Date Submitted: September 26, 2000.
Date Decided: October 20, 2000.
Superior Court of the State of Delaware, in and for New Castle County, C.A, No. 96C-12-146.
Edward M. McNally and Lewis H. Lazarus, Esquires, of MORRIS, JAMES, HITCHENS WILLIAMS, Wilmington, Delaware; OF COUNSEL: Philip H. Schaeffer, Dwight A. Healy, Karen M. Asner, David G. Hille, Esquires, of WHITE CASE, New York, New York, Attorneys for Plaintiff.
Michael D. Goldman, Stephen C. Norman, and Matthew E. Fischer, Esquires, of POTTER ANDERSON CORROON, Wilmington, Delaware; Attorneys for Defendants Hallwood Realty Corporation, The Hallwood Group Incorporated, Anthony J. Gumbiner, Brian M. Troup, and William L. Guzzetti.
John H. Small, Elizabeth M. McGeever, and Sheldon K. Rennie, Esquires, of PRICKETT, JONES ELLIOTT, Wilmington, Delaware, Attorneys for Defendants Alan G. Crisp, William F. Forsyth, Udo H. Walther, and Edward T. Story.
Before VEASEY, Chief Justice, HOLLAND, and BERGER, Justices.
Plaintiff Gotham Partners, L.P. has brought a motion for partial summary judgment seeking a declaration that it: I) has standing to pursue this derivative action on behalf of nominal defendant Hallwood Realty Partners, L.P. ("the Partnership"); and 2) was a substituted limited partner of the Partnership as of 1994.
This motion is necessary because the defendants in this action, including the General Partner of the Partnership, defendant Hallwood Realty Corporation ("the General Partner"), deny that Gotham was ever admitted as a limited partner before September 11, 2000. This denial is rather unusual because the record is clear that Gotham has owned units in the Partnership since 1994, made timely application to be a limited partner, subsequently received several communications from the General Partner addressed to "Dear Limited Partner," and brought a books and records action in this court in which the General Partner admitted that Gotham was a limited partner. Nonetheless, having "discovered" in December 1998 that Gotham was not a limited partner after all, the General Partner contends that Gotham lacks standing to press its derivative claims.
In this opinion, I grant Gotham's motion for three reasons. First, even if Gotham was simply an assignee as of the time the wrongs it complains of occurred, it still has standing pursuant to 6 Del. C. § 17-1001. Second, the only plausible reading of the record evidence is that Gotham was admitted as a limited partner and treated as such by the General Partner after the General Partner listed Gotham on the Partnership's only list of limited partners in 1994. Finally, the only alternative to a conclusion that Gotham was admitted in 1994 is a conclusion that the General Partner breached its obligation to timely consider Gotham's application. The proper remedy for that breach is admission of Gotham as of the date its application should have been considered in 1994, a date that is sufficient to give it standing.
I. A Prologue On Gotham's Current Status As A Limited Partner
When this motion was briefed and argued, the defendants took the position that Gotham was not and had never been a limited partner. That argument became difficult to maintain in its pure form, however, because the undisputed facts demonstrated that the record permitted, as shall be seen, only two alternatives. One was that Gotham had in fact been admitted as a limited partner by the General Partner in 1994, the year before the transactions at issue in this case were consummated. The other alternative is that the General Partner failed to consider Gotham's application in 1994 and thus breached the partnership agreement itself.
At oral argument, I suggested that the obvious remedy in the latter scenario was to admit Gotham as of the date its application should have been considered. Counsel for the defendants disagreed and said that the question of remedy must await a hearing. Instead of granting that request, I permitted him to file an additional submission addressing the remedy issue.
In lieu of a remedy argument, counsel for the defendants filed a letter indicating that the General Partner had decided to admit Gotham (and every other unitholder) as a limited partner. Believing I had "a good reason for taking the easy way out," I put aside this aspect of the complex motion practice then pending in this case. I did so because I thought that the defendants would only write me such a letter if they had structured their admission of Gotham to moot the current motion and to enable Gotham to press its derivative claims.
J. LENNON P. McCARTNEY, Day Tripper, Sony/ATV Songs LLC..
But nay. It was not so. It took me an office conference "to find out, [b]ut I found out" that the General Partner had merely admitted Gotham as of September 2000 and took the position that Gotham's admission was not retroactive to 1994. Therefore, its decision to admit Gotham had no bearing on the need to determine this motion.
Id.
Id. ("Now she's a big teaser, She took me half the way there . . . It took me so long to find out, But I found out").
Having set forth the unusual context in which this motion is now presented, I turn to its resolution.
II. The Nature of The Underlying Litigation
Gotham filed this action in June 1997. Its complaint challenges three transactions entered into by the Partnership: 1) a March 1995 reverse unit split (the "Split"); 2) a March 1995 stock option plan (the "Stock Option Plan"); and 3) a June 1995 odd-lot tender offer (the "Odd-Lot Offer"). The units that were purchased by the Limited Partnership in connection with the Split and the Odd-Lot Offer were in turn sold by the Partnership to Defendant Hallwood Group Incorporated ("HGI"), the sole owner of the General Partner. Meanwhile, the Stock Option Plan granted options to officers who owed their careers and loyalties to HGI.
Gotham alleges that the sale of the units and the issuance of the options occurred on economic terms that were unfair to the Partnership and unduly favorable to HGI. Furthermore, Gotham claims that the Challenged Transactions were designed to secure HGI's control over the Partnership and not to benefit the Partnership. The Split and Odd-Lot Offer allegedly did so by increasing HGI's equity interest in the Partnership from 5.15% to 24.7%. When unit options to HGI insiders are added, HGI and its affiliates controlled 29.4% of the Partnership's Units. This increase was sufficient to have an entrenching effect, argues Gotham, because the partnership agreement for the Partnership (the "Agreement") states that a two-thirds vote of the limited partners is necessary to replace the General Partner.
III. Legal Analysis
This opinion focuses solely on Gotham's status as a plaintiff. Namely, is Gotham entitled to an award of summary judgment declaring that it has standing to pursue its derivative claims on behalf of the Partnership? The answer to that question turns on two subsidiary questions: 1) whether Gotham has standing as an assignee to assert its derivative claims; and 2) whether Gotham is entitled to summary judgment declaring it a limited partner of the Partnership as of 1994. If the answer to either question is yes, Gotham may maintain this action.
I address these issues using the well-established standard applicable under Court of Chancery Rule 56. That standard requires that I draw all reasonable inferences from the record in favor of the defendants and only grant Gotham's motion if its legal entitlement to summary judgment is clear based on the undisputed facts in the record.
A. Gotham Has Standing As An Assignee To Bring Its Derivative Claims
Section 17-1001 of the Delaware Revised Uniform Limited Partnership Act [?] ("DRULPA") was amended on August 1, 1998 to provide that a derivative claim may be prosecuted by a "limited partner or an assignee of a partnership interest." The plaintiff must have had that status at the time the derivative action was commenced and at the time of the challenged transaction or conduct.
6 Del. C. § 17-1001 (emphasis added).
The defendants admit that Gotham is an assignee and has been one continuously since before the Challenged Transactions occurred. Nonetheless, they contend that Gotham cannot bring this derivative action unless it was a limited partner in 1994 because § 17-1001 of DRULPA was not amended to give standing to assignees until a year after this action was filed.
I use the words "as of 1994" or "in 1994" as a short-hand that means before the Challenged Transactions, which were consummated in 1995.
But, contrary to the defendants' position, I conclude that the General Assembly has expressed its intent to retroactively apply its 1998 amendment to § 17-1101. In August 1999, § 17-1108 was amended to provide that:
. . . Unless expressly stated to the contrary in this chapter, all amendments of this chapter shall apply to limited partnerships and partners whether or not existing as such at the time of the enactment of any such amendment.
6 Del. C. § 17-1108. See also M. LUBAROFF P. ALTMAN, LUBAROFF ALTMAN ON DELAWARE LIMITED PARTNERSHIPS § 11.10 at 11-46 (2000) ("with respect to amendments of the Act enacted prior to August 1, 1999, the synopsis attached to the Senate Bill containing the 1999 amendments of the Act provides that the new amendment confirms the intended retroactive effect of amendments of the Act theretofore enacted.").
The synopsis to that legislation makes clear that the General Assembly's intent was to make all amendments to DRULPA retroactive regardless of when the amendments were made:
This section amends § 17-1108 of the Act to confirm the intended retroactive effect of amendments of the Act heretofore, now and hereafter enacted.
Senate Bill No. 177, 140Z" General Assembly, 72 Del. Laws c. 128 (July 2, 1999) (emphasis added).
There is nothing "expressly stated to the contrary" in §§ 17-1001 or 1002 to indicate that the 1998 amendments to those sections were not intended to be retroactive. Therefore, Gotham's conceded assignee status establishes standing with respect to its derivative claims.
B. Is Gotham Entitled To Summary Judgment Declaring It A Limited Partner As of 1994?
Because the General Assembly has made its intentions plain, I need not address Gotham's.
1. Facts Bearing On Gotham's Status As A Limited Partner As of 1994
Gotham made its first purchases of units in the Partnership in March 1994 and has owned units continuously ever since. As of October 1994, Gotham owned 207,000 pre-Reverse Split units or 41,400 post-Split units. By May of 1995, Gotham had increased its ownership to 46,400 units.
alternative argument that the amendment to § 17-1001 should apply retroactively because it was simply a clarification of who could press claims on behalf of the Partnership for which a legal basis already existed. See Hubbard v. Hibbard Brown Co., Del. Supr., 633 A.2d 345, 354 (1993) ("As a general rule statutes relating to remedies and procedure are given a retrospective construction.") (quotations and citation omitted).
Thus, there is no question that Gotham owned units before the Challenged Transactions and has held units continuously since then.
Indeed, Gotham currently owns 218,217 units, or 14.8% of the Partnership. It cannot buy materially more units without triggering the Partnership's Rights Plan, or poison pill.
Like many market participants and most other unitholders in the Partnership, Gotham's units are held by the Depository Trust Company ("DTC") in the name of Cede Co. ("Cede") through accounts maintained by Gotham's brokers at DTC. For most of the relevant period, Gotham's broker was Bear Stearns Securities Corporation.
2. The Process By Which Gotham Allegedly Made Application
The Partnership was created in 1990 by the roll-up of several other limited partnerships into one (the "Roll-Up"). The persons who were unitholders and participated in the Roll-Up became limited partners of the Partnership. But any persons who acquired units since that time have had to obtain limited partnership status in accordance with the Agreement's provisions for admission.
Under the Agreement:
[E]ach assignee of a Unit . . . shall be deemed to have applied to become a Substituted Limited Partner with respect to the Unit transferred to such Person by executing and delivering to the Transfer Agent a Transfer Application at the time of such transfer as provided in Section 13.03 hereof or by otherwise becoming an assignee as provided for herein.
Article I of the Partnership Agreement defines "Transfer Application" as "[am application and agreement in the form set forth on the back of the Certificate. . . ." Agreement at G-5.
Agreement § 13.05(a) (emphasis added).
Thus, the Agreement is written to make the application process as automatic as possible. A unitholder was deemed to have applied either by: 1) submitting a transfer application; or 2) "otherwise becoming an assignee."
Taking these provisions out of order, the defendants do not dispute that Gotham is an assignee. The defendants are unable to explain why this status alone was insufficient to make Gotham an applicant for full admission as a limited partner under the plain language of § 13.05 (a).
See Agreement § 13.03(c) (showing the simplicity with which this process was supposed to work by indicating that a request for admission as a limited partner could be made orally or "by such other action such as payment for a Unit or acceptance of a Certificate").
Likewise, the record is clear that Gotham sought admission by having a transfer application filed on its behalf as to units it purchased in 1994. There is no dispute that such documentation was submitted by DTC to the Transfer Agent for the Partnership on behalf of Bear Stearns as to at least some of its units beneficially owned by Gotham before the time of the Challenged Transactions.
The Partnership engaged a transfer agent, Equiserve, L.P., to assist it in maintaining its unitholder list, processing transfer applications, and making necessary securities and tax law filings and communications.
Of great significance is the fact that the certificates sent to the Transfer Agent included a section entitled "APPLICATION FOR TRANSFER OF UNITS" that says that the applicant, who was Cede, "requests admission as a Substituted Limited Partner in the Partnership and agrees to be bound by the Partnership Agreement as it may be amended from time to time and to execute any document that the General Partner may reasonably require to be executed in connection with the transfer and admission of the Applicant as a Substituted Limited Partner. . . ".
Hille Aff. Ex. C.
The Agreement clearly contemplated that a large number of limited partners would hold their units as beneficial owners through brokers that used the services of DTC and Cede. Thus, the Agreement expressly states:
A request by any broker, dealer, bank, trust company, clearing corporation or nominee holder to register transfer of a Unit, however signed (including by any stamp, mark, or symbol executed or adopted with intent to authenticate the Certificate), shall be deemed to be an execution of a Transfer Application by and on behalf of the beneficial owner of such Unit.
Agreement § 13.03(f).
As a result, the undisputed facts demonstrate that Gotham timely applied to become a limited partner of the Partnership.
3. The General Partner's Obligations And Practices With Regard To Processing Applications For Admission
Section 13.05(b) of the Agreement establishes a process for processing Transfer Applications. The first step requires that the Transfer Agent prepare a monthly list of transfers and send it to the General Partner. The second step requires the General Partner to decide whether to admit "any one or more" of the assignees listed on the transfer list as a limited partner no later than 30 days after receiving the list.
Agreement § 13.05(b).
Id.
Although § 13.05(c) of the Agreement indicates that the General Partner must give "written consent" to any application for limited partnership status and has "sole and absolute" discretion to withhold or grant such consent, the Agreement does not state what form that consent must take. But the Agreement does clearly define a "limited partner" as:
Agreement § 13.05(c).
Any person shown as a limited partner of the Partnership on the books and records of the Partnership. A person shall be admitted as a limited partner at the time such person is listed as a limited partner on the books and records of the Partnership.
Agreement at G-3 (emphasis added).
As one would expect from an entity that was doing business in today's securities markets under agreement provisions such as those set forth above, the Partnership had a system for tracking beneficial owners. To that end, it engaged Wall Street Concepts, Inc. ("WSC") as its agent to identify beneficial owners and produce a "Street Name Investors Report" for it. And each month, Gotham's broker Bear Steams provided WSC with a list of its client's purchases, including those made by Gotham. WSC then included that information in its reports to the Partnership on units held in street name. At year end 1994, for example, WSC's records indicated that Gotham owned 207,000 pre-Split Units.
Scott Aff. Ex. B.
Takvorian Aff. ¶ 5.
Scott Aff. ¶ 7, Ex. D.
Scott Aff. Ex. D.
The Partnership used the information it received from WSC as well as from the Transfer Agent to create a unitholder list from its Partnership Unit Accounting System or "PUA," which I will henceforth refer to as the "Unitholder List." WSC provided information regarding units held in street name and the Transfer Agent provided information regarding record holders. The Unitholder List prepared from the PUA is used for, among other things, preparing IRS Schedule K-ls for tax reporting purposes. The forms distributed to Gotham by the Partnership from this system for 1994 and subsequent year accurately track each of its transactions in Partnership units. Thus the Unitholder List contained Gotham as of 1994.
Schaeffer Aff. Ex. 20, Kelley Dep. at 74.
Ackman Aff. Exs. D-I.
The defendants could not produce a Unitholder List for 1994 or 1995. There is no dispute, however, that the list would have contained Gotham as of those years and as of the time of the Challenged Transactions. In this regard, it is noteworthy that Gotham received a K-i for 1994 generated from the PUA database containing the Unitholder List. Schaeffer Aff. Ex. 20, Kelley Dep. at 73-76; Scott Aff. ¶ 7.
Nonetheless, it appears that the General Partner did not take measures to ensure strict compliance with § 13.05(b)'s requirement that it receive a monthly transfer list which the General Partner was to use to make limited partner admission decisions. The contract with WSC called for a monthly report, which along with the information provided by the Transfer Agent, would have enabled the General Partner to comply with its obligations to consider applications on a timely month-to-month basis. But it is not clear exactly how the General Partner used this information or if it consistently received such reports.
Schaeffer Ex. 10, at 122-124; Ex. 24 at 82-83. For example, the Partnership's Transfer Agent account representative testified that he was not even sure what a Transfer Application was. Schaeffer Ex. 10, at 62-64.
See Scott Aff. ¶ 7, Ex. B (indicating that WSC standard service included monthly reports plus a year-end tape).
The record reveals that the General Partner did not give much detailed attention to the admission process, but appears to have been willing to admit every assignee as a limited partner by listing the assignee on the Partnership's books and records and assuming that this was sufficient written consent to accord the assignees limited partner status. Such an approach would have comported with the virtually automatic application process set up by the Agreement and the simple definition of limited partner in the Agreement as someone admitted as such on the Partnership's books and records.
Nevertheless, to win this motion, the General Partner has taken the unusual tack of arguing (in the alternative) that it completely ignored its contractual duty to timely consider any applications. The General Partner faces a record that indicates that the Transfer Agent received an extremely large number of Transfer Applications and an Agreement that deems every assignee to have made application for admission. Nonetheless, the General Partner asserts that "no assignees requested admission of Substituted Limited Partners in accordance with the requirements of the Partnership Agreement . . ." and that the General Partner had "not admitted any assignees as Substituted Limited Partners" before September 11, 2000. Put simply, the General Partner argues that no unitholder was granted admission as a limited partner in the decade between the Roll-up and September 11, 2000. So fervent is the defendants' desire to deny Gotham standing that the defendants even go as far as to argue as a litigation posture that the General Partner did not even admit itself as a limited partner even though its President, defendant William L. Guzzetti, testified that the General Partner had been admitted in 1995 at the time of the Challenged Transactions.
Schaeffer Exs. 49 50.
Id.
But, as will be seen, the record is replete with evidence that the defendants only recently discovered that this was the situation and that before this litigation heated up, the General Partner believed and acted as if it had admitted Gotham and many other unitholders as limited partners.
4. The PUA Generated Unitholder List Is The Only Partnership List of Limited Partners
When required to produce to Gotham the Partnership's "list of Limited Partners" by a stipulated order in a prior books and records case between Gotham and the Partnership, the General Partner produced a copy of the Unitholder List derived from the PUA.
Schaeffer Aff. Ex. 39, ¶ 1(g).
What is of more significance is the fact that the defendants now maintain that the Unitholder List is not a list of limited partners, but simply a list of all unitholders, be they mere assignees or full-fledged limited partners.
This claim is striking for a few obvious reasons. One is that it is at odds with the belief of the officer of the General Partner responsible for producing that List, Executive Vice President John Tuthill, who testified as follows:
Q: Was it your understanding at the time, Mr. Tuthill, that that was a list of the limited partners of the Partnership?
Schaeffer Aff. Ex. 24, Tuthill Dep. Vol. 3, at 73.
This claim is also quite notable because it rests on the assertion that the General Partner has not maintained any list of limited partners in the books and records of the Partnership. At oral argument, counsel for the General Partner admitted that at that time the Partnership had no list of limited partners, but could figure out if it had to which, if any of the unitholders, were limited partners.
This struck me as peculiar. One would expect, in view of the Agreement, that the General Partner would contend that it had complied with its clear duties under § 13.05(b) by admitting limited partners through inclusion in the Unitholder List. Because the General Partner's obligations under § 13.05(b) are mandatory and clear, because the Agreement defines a limited partner as anyone listed as such in the Partnership's books and records, because the General Partner affirmatively listed on the Unitholder List all beneficial owners on behalf of whom transfer applications had been submitted, and because there is no evidence that the General Partner ever denied any of the thousands of transfer applications received by the Transfer Agent, such an assertion would have made abundant sense.
But in order to justify their position that Gotham was not a limited partner in 1994, the defendants instead advance a position that rests on an admission that the General Partner has breached § 13.05(b) of the Agreement. By contending that the Unitholder List is not a list of Limited Partners and by failing to present any evidence that the General Partner ever used any other process besides such inclusion to determine whether to admit an assignee as a Limited Partner, the defendants concede a clear breach of contract.
The defendants' bewildering fog of an argument cannot, however, obscure the clear fact that the only list the General Partner maintains of "limited partners" has contained Gotham for all relevant periods. Nor can it obscure the clear fact, as I will next discuss, that the key employees of the General Partner in charge of dealing with relations with unitholders assumed that all the unitholders on the Unitholder List were in fact limited partners of the Partnership.
5. The General Partner Acted As If Gotham And Other Unitholders Were Limited Partners
The record reveals that the relevant officers of the General Partnership used the term "unitholder" interchangeably with the words "limited partner" until they were instructed to do otherwise in connection with this litigation.
Schaeffer Aff. Ex. 23, Gent Dep. at 126-127 Ex. 20, Kelley Dep. at 264.
The post-hoc nature of the distinction the General Partner now makes between mere "unitholders," on the one hand, and "limited partners," on the other, is further solidified by the complete lack of understanding possessed by the relevant officers of the General Partner regarding how in fact one becomes a limited partner of the Partnership. They just did not know how the admission process worked. For example, Richard Kelley, the individual responsible for dealing with the Transfer Agent beginning in 1994, and an individual defendant designated under Rule 30(b)(6) as having knowledge about the admission of limited partners, testified as follows:
Id. Ex.55.
Q: Do you have an understanding at all, sir, sitting here today as to what the procedures are for admission of limited partners to the Partnership?
A: I do not have an understanding of the procedures.
* * * Q: Mr. Kelley, who is knowledgeable at the General Partner as to the process or procedures by which persons or entities are admitted as limited partners to the Partnership?
Id. Ex. 20, Kelley Dep. at 259.
A: I don't know.
Q: You have no understanding as to who you would go to discuss that subject at the General Partner?
A: Since it is a legal issue, I would say counsel if that situation ever arises in my department.
Id. Ex. 20, Kelley Dep. at 261-62.
William Guzzetti, the President of the General Partner, and the only other person designated by the General Partner under Rule 30(b)(6) as having knowledge on this issue was similarly uninformed:
Q: Yes. Are you familiar with the procedures of the partnership agreement for the admission of substitute limited partners?
Id. Ex. 55.
A: No.
Q: Do you have any understanding of what is required for admittance?
A: Generally speaking, an application and a consent by the General Partner.
Q: Are you familiar with how an assignee can apply for admission?
Id. Ex. 33, Guzzetti Dep. at 160.
John Tuthill, the Executive Vice President of the General Partner, testified to the same effect:
Q: Are you familiar with the procedures for admission of assignees as limited partners?
Id. Ex. 24, Tuthill Dep. at 72.
Because the General Partner had treated all unitholders on the Unitholder List as limited partners before this litigation, it appears that the officers of the General Partner did nothing affirmative in response to the voluminous numbers of Transfer Applications the Partnership's Transfer Agent received, and instead appears to have relied on WSC to prepare a list reflecting unitholders who the General Partner then simply treated as limited partners because the General Partner affirmatively included them on the Unitholder List.
Official communications between the Partnership and Gotham also reflect the General Partner's practice of treating everyone on the Unitholder List as a Limited Partner. For example, the K-I the Partnership sends each year is addressed to Gotham as "Dear Limited Partner." Although the defendants claim that the K-Is are sent to each unitholder because each is considered a "limited partner" under federal tax laws, they cite no federal requirement that the salutation be imprecise. Nothing would bar the General Partner from addressing assignees as "assignees" and explaining that assignees are "limited partners" for purposes of federal tax laws only. This was never done.
Ackman Aff. Exs. D-I.
Admittedly, there were other communications from the General Partner addressed "Dear Unitholder." Norman Aff. Exs. 42-45. As indicated, however, the General Partner equated the terms unitholder and limited partner.
Likewise, the General Partner's internal behavior reflects its belief that the holders on the Unitholder List had been admitted as limited partners. For example, during the Odd-Lot Offer, an officer of the General Partner created a chart tracking the effect unit purchases would have on the General Partner's ability to block a removal vote. The chart identified the percentage of votes held by unitholders unaffiliated with the General Partner that would be necessary to remove the General Partner. At one point, therefore, the chart indicated that 87.28% of the unaffiliated units would have to vote for removal in order to replace the General Partner. A core assumption of this chart was that all the unitholders had voting rights.
E.g., Schaeffer Ex. 26.
Id.
Kelley Aff. ¶ 7 (author admitting that he assumed all holders had the right to vote).
Likewise, a memorandum provided to the General Partner's board of directors in January 1996 listed Gotham as one of the Partnership's "Top Four Limited Partner Groups."
Schaeffer Ex. 25, at HR 28227.
Notably, when the General Partner realized that Gotham was approaching the 15% trigger for the Partnership's poison pill, it contacted Gotham. Thus this was a context in which the General Partner was clearly acting with an awareness of the possibility that Gotham might seek to make a tender offer to secure a sufficient number of voting units to remove the General Partner. Yet the General Partner never informed Gotham of the most formidable barrier to such a move — the fact that the General Partner had not admitted Gotham and that Gotham itself had no voting rights. The fact that the General Partner did not do so bolsters the conclusion that it believed that Gotham was a limited partner.
Finally, in connection with an earlier books and records action in this court, the General Partner evidenced its belief that Gotham was a limited partner. In responding to Gotham's demand, the General Partner alleged that Gotham was seeking "preferential treatment for [itself] to the detriment of the other partners of the Partnership. . . ." When the parties could not work out the demand themselves and Gotham filed suit, the General Partner answered the complaint by admitting that Gotham was a limited partner but otherwise mounting a feisty defense.
Schaeffer Ex. 36 (emphasis added).
Schaeffer Ex. 38, § 7.
Not until the defendants answered the complaint in this action in December 1998 did the General Partner first "discover" and assert that Gotham was not a limited partner. Although this court properly permitted an amendment to the answer in the books and record action to enable the Partnership to withdrawal its admission and contest Gotham's status as a limited partner on the merits in this litigation, the fact that the General Partner did not happen to notice that Gotham was not a limited partner until late 1998 remains highly probative of whether Gotham was previously admitted as a limited partner by the General Partner. It is telling, to say the least, that none of the officers of the General Partner could come up with this defense on their own or even with the assistance of able counsel in the books and records action.
Gotham Partners. L.P. v. Hallwood Realty, Del. Ch., C.A. No. 15578, Steele, V.C. (Oct. 18, 1999).
6. Conclusion: Gotham Is Entitled To Summary Judgment Declaring It A Limited Partner As of 1994 On this record, I have no hesitance in concluding that Gotham has demonstrated its entitlement to summary judgment on the basis of the undisputed facts.
The evidence clearly demonstrates that one of two things happened with Gotham's application. The overwhelmingly most probable is that the General Partner exercised its discretion to grant all applications it received by affirmatively including the assignees in the Unitholder List. Engaging in such a practice was clearly consistent with the virtually automatic limited partner application and admission process set up by the Agreement. By including an assignee on the Unitholder List, the General Partner signified its written consent to the assignee's admission as a limited partner in a manner that comported with the Agreement's definition of a limited partner as being a person who was recognized as such in the Partnership's books and records. And while it is true that the General Partner had discretion not to admit limited partners, it is implausible that the General Partner consciously chose to silently deny every application it received. That makes no sense, especially because no officer or director of the General Partner was aware of this rather important policy and because there is no written record reflecting the General Partner's decision to take such an extraordinary approach.
A less probable scenario is that the General Partner simply failed to consider any of the numerous applications for admission it has received in the decade since the Roll-up. If that is in fact the case, the General Partner breached § 13.05(b) and cannot rely upon that breach to support its argument that Gotham was not a limited partner as of 1994. The General Partner's obligation to make a timely determination about Gotham's transfer applications in 1994 was mandatory.
In this respect, I reject the defendants' argument that the General Partner's admission of Gotham as of September 11, 2000 is an adequate remedy for a breach of that mandatory duty. That the General Partner would now grant Gotham's application leaves me with little doubt that it would have admitted Gotham in 1994. As of September 11, 2000, the General Partner had the motive to defeat this litigation and to insulate itself from a fight for control by an entity it has come to regard as an unethical capitalist, yet was willing to admit Gotham as a limited partner on that date. The concerns the General Partner now harbors about Gotham' s suitability emerged well after it was to have considered Gotham's initial application in 1994. Given this fact and the fact that the General Partner consistently assumed that Gotham was in fact admitted as a limited partner until late 1998, there is no record support to buttress a conclusion that the General Partner would have denied Gotham's application in 1994. And to the extent there exists uncertainty about what the General Partner would have done in 1994 had it complied with its contractual duties, that uncertainty must be resolved against the General Partner, the breaching party, and in favor of Gotham, which made a proper application at that time.
For example, February 15, 2000, the General Partner caused the Partnership to sue Gotham in federal court in New York. The complaint alleges violations of the federal securities laws.
Indeed, the public policy implications of accepting the defendants' argument would be quite disturbing. Taken at face value, the defendants' argument is that they are now insulated from defending a derivative suit because the General Partner breached its obligations to timely consider applications for limited partnership admission. That is, the General Partner's breach was, under the defendants' theory, an insurance policy against liability to the Partnership's unitholders.
The defendants also ignore the fact that the sometimes metaphysical distinction between derivative and individual actions is clear in the scenario wherein the General Partner had simply failed to act on the transfer applications. To the extent that the General Partner breached its contractual obligation to consider transfer applications promptly, the unitholders adversely affected by that breach obviously possess individual claims against the General Partner and other culpable parties for redress for any harm flowing from the breach of this duty. Such harm would include loss of the right to press a derivative suit. The only sufficient and fitting remedy for such harm is an order requiring the General Partner to admit Gotham as a limited partner as of 1994 and exposing the General Partner and any other culpable defendant to the same liability as they would have faced in this suit had the General Partner complied in a timely way with its contractual duties.
Assuming that the defendants' are correct and lam wrong about the effect of 6 Del. C. § 17-1007.
Because Gotham ultimately must be accorded limited partnership status as of 1994 under either scenario possibly supported by the record facts, I conclude that Gotham is entitled to summary judgment on its claim that it is a limited partner as of that time. It would be wasteful to determine which scenario is the real one, when the legal consequences of that determination are insignificant.
The defendants' motion for summary judgment predicated on the fact that Gotham is not a limited partner is denied.
As mentioned, the record evidence, in my view, is strongly supportive of the scenario whereby the General Partner gave written consent as a virtually automatic matter through the Unitholder list process. All of its behavior is consistent with that scenario and the lack of knowledge of the admission process displayed by General Partner representatives is most plausibly read as simply reflecting their lack of attention to a process they believed was on autopilot.
Finally, I note that my rejection of the defendants' arguments is consistent with this court's well-reasoned decision in the case of In Re American Tax Credit Properties Limited Partnerships. In that case, a General Partner tried to deny that it had admitted an assignee as a substituted limited partner under a partnership agreement utilizing the same sort of virtually automatic application process at issue in this case. To support its position, the general partner in American Tax Credit also relied on its own ignorance of how the application process worked, its own failure to maintain a list of limited partners, its discretion to deny admission for any reason, its assertion that no request for admission had ever been made by an assignee, and the fact that the only list of unitholders maintained by the partnership's transfer agent did not distinguish between assignees and limited partners.
Del. Ch., 714 A.2d 87 (1997).
Id. at 95. To be fair, there is also a part of the decision that indicates that the transfer agent's records referred to the plaintiff as a partner, id. at 92, although the latter part of the opinion seems to accept the proposition that the transfer agent list made no distinction. Id. at 95. The important point the opinion was making, however, is that: i) when a partnership agreement sets up an easy application process that enables admission by a writing adding the applicant to the partnership's only list of partners; ii) when an applicant submits an application and its name is added to the only list of partners; in) when no denial of the application is sent to the applicant; and iv) when the applicant is thereafter treated as if it is a limited partner, it is appropriate for the court to conclude that the applicant was admitted and to disregard a self-serving disavowal of that status by a general partner whose defense rests on a breach of its own contractual obligations to properly consider applications.
Vice Chancellor Lamb rejected the defense. The heart of his ruling was that, in accordance with common industry practice, the partnership agreement's admission processes were designed to be as efficient and automatic as possible given the unique tax-code driven legal restraints on free transferability that apply in the limited partnership context. Because:
(i) the plaintiff had made proper application under the agreement; (ii) the partnership's transfer agent had listed the plaintiff on the only list of limited partners maintained on behalf of the partnership; (iii) correspondence between the partnership and the plaintiff was thereafter addressed to the plaintiff as a limited partner; and (iv) the General Partner had essentially delegated the application process to its transfer agent, the court concluded that the plaintiff had been admitted as a limited partner. Similarly, Vice Chancellor Lamb inferred that the General Partner's ignorance about the application process was evidence not of a considered decision to deny all applications, but of its decision to delegate the function to its transfer agent because the General Partner had no reason to deny an application for limited partner status until the basis for litigation with the plaintiff arose.
Id.
The reasoning of American Tax Credit thus fully supports the conclusion I reach in this case.
IV. Conclusion
For the foregoing reasons, Gotham's motion for summary judgment is GRANTED and the defendants' motion for summary judgment is DENIED.